Last quarter, two of the world’s biggest and most influential financial institutions announced their coal sector strategy was to aggressively exit. Around the same time, one of the world’s largest producers of coal, and the world’s most significant consumer of coal, both expressed how much money they are losing financially from these businesses. This article pieces together these major news stories to conclude how dangerous and risky it is to persist with coal in your portfolio/fund.
Back in 2009 I played a small part in one of the first academic research projects on sovereign wealth fund holdings. It was where I learned about the influential giant that was Norway’s sovereign wealth fund was. Named “The Government Pension Fund of Norway”, it has been the world’s largest since 2011 or 2012 and is currently around $900 billion in size. I saw through the research how smart its investment decisions were, and how consistently well it had grown. After the end of that research project I never heard about the fund again. But I was reacquainted with The Government Pension Fund of Norway when from late May to early June it was making headlines due to recommendations from a parliamentary committee that it should sell stakes in firms that generate more than 30% of its output or revenue from coal-related activities. According to Reuters’ May reference, “its coal mining assets totalled 493 million crowns ($63.51 million) at the end of the first quarter [of 2015], down from 805 million three months earlier while its general mining assets were worth 31 billion crowns and power production 109 billion.” It also reported, via Truls Gulowsen, Head of Greenpeace in Norway, that “the value of the shares that will be divested could be as much as $5.5 billion.”
The driver for The Government Pension of Norway to make such a significant change to its investment strategy was long-term financial risk. Also reported in the Reuters article, the parliamentary committee stated that “investing in coal companies poses both a climate risk and a future economic risk”. Asked to comment for the New York Times in its June article, Marthe Skaar, a spokeswoman from Norges Bank Investment Management, reported that the motivation was “safeguarding and building financial wealth for future generations in Norway”.
Weeks earlier, AXA, the second largest financial services company by revenue (second only to Warren Buffett’s empire Berkshire Hathaway) made a similar commitment. Its CEO Henri de Castries announced to a conference that “the facts are undeniable, if we think we can live in a world where temperatures would have increased by more than 2 degrees we’re just fooling ourselves.” Essentially, the inability for society to exist in such a world presented AXA with far too great a risk for the company’s investment portfolios, and decided to sell 500 million Euros of coal assets by the end of 2015. By 2020, it plans to invest 3 billion Euros into the renewable energy sector.
These, and the case studies of the Rockefeller, universities in the United States and Swedish pension giant AP4 are well known to a number of my personal friends in investment and fund management. My friends all conceptually understand climate investment risk, but struggle to appreciate how serious the risks are, and how it impacts their assets under management, or the equities they are responsible for looking after. After all, following other organisations is only a source of inspiration rather than a reason for decision.
More compelling are recent news items on the future of coal, one each from a coal producer and a coal consumer.
In early May, an article in Business Spectator (via Australian Financial Review) featured a quote by Rio Tinto’s head of coal Jean-Sébastien Jacques saying that coal will remain in the doldrums for the next 3-4 years:
“In coal we have to be ready that we have multiple years, it could be even three or four years, before we see an inflection point. [T]here will be volatility, don’t get me wrong; but where you say, ‘Well there is a real step change’ – that won’t be in the short term.”
“Is coal part of Rio Tinto today? The answer is yes, but any asset is for sale at any point in time. If somebody knocks on the door and makes a very good offer, we would have to look at it.”
Inevitably, Rio Tinto had been preparing its very own divestment, with a $4 billion exit from Australian coal assets. Market updates on this move have been coming weekly for the last quarter as the deal moves closer to finalisation. The way I see it, if one of the world’s biggest mining firms sees no future in coal, then there is no future in coal.
The picture becomes clearer when it is not only producers but consumers that cannot make money from coal. China is the world’s biggest consumer of coal and the largest generator of electricity from coal, and the country’s amazing demand for coal has been well documented in the past. Not so anymore. The Australian reported in March that “90 per cent of Chinese coal mines in the red”, information it sourced from the state-sponsored China Coal Industry Association. The association has declared 2015 as a turning point, the beginning of China’s coal downturn. Making things worse is the Chinese government’s pressure to reduce emissions and produce cleaner coal despite tightening margins. Another giant red flag for the future of coal.While I have a finance background in university, have worked on academic research and act as the “champion”, if you will, for the South Pole Group’s investment climate impact assessment tools in Australia on behalf of Climate Friendly, I am by no means an expert on investment and funds management. I am certainly not qualified or able to offer financial advice. All I have done is collated evidence put forward directly by the world’s largest and most successful sovereign wealth fund, the second-ranked global financial services business, one of the world’s top mining companies, and the most important global consumer of coal. All four organisations reinforce that the future of coal is a significant risk to stable long-term portfolio returns and performance.